Q4 2021 Nexpoint Real Estate Finance Inc Earnings Call
[music].
Good day and welcome to the next point real estate Finance Q4, 2021 quarterly conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mick Jackie Graham. Please go ahead ma'am.
Good day, everyone and welcome to next point Real estate Finance This conference call to review the company's results for the fourth quarter and full year ended December 31st 2021.
On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, Matt Mcgrew, Our executive Vice President and Chief Investment Officer, Matt <unk>, Senior Vice President investment and asset management, and Paul Richard Vice President origination.
As a reminder, this call is being webcast through the Companys website.
He has got an excellent dot com before we begin I would like to remind everyone that this conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act 1995 that are based on management's current expectations assumptions and beliefs.
Listeners should not place undue reliance on any forward looking statements and are encouraged to review the company's annual report on Form 10-K .
The company's other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward looking statements.
The statements made during this conference call speak only as of today's date and except as required by law and rough does not undertake any obligation to publicly update or revise any forward looking statements.
This conference call also include an analysis of non-GAAP financial measure for a more complete discussion of these non-GAAP financial measure see the accompanying presentation that was filed earlier today.
I'd now like to turn the call over to Brian Mitts. Please go ahead Brian .
Jackie I appreciate everyone joining us today.
Discuss our results for the quarter of the year, and then turn it over to the team for detailed commentary.
Thanks, Bill for the year was $3 93 per diluted share compared to net income of $1 74 per diluted share for 2020.
Earnings available for distribution was $1 89 per diluted share in 2021 as compared to $1.46 per diluted share in 2024, an increase of 29, 5% cash.
Cash available for distributions was $2 21 per diluted share in 2021.
<unk> to $1 67 per diluted share in 2024, an increase of 32, 7% net.
Net income for the quarter was 90 cents per diluted share compared to net income of $1 32.
<unk> four per diluted share Q4 2020.
Earnings available for distribution was <unk> 54 per diluted share in Q4 2021 compared to 44 per diluted share in Q4, 2020, and 51 per share in Q3, 2021, or an increase of $22 seven and five 9% respectively.
Cash available for distribution was 63 cents per diluted share in the fourth quarter of 2021.
<unk> <unk> 47 per diluted share in the fourth quarter of 2020 and 62.
Per diluted share.
Third quarter 2021.
Or an increase of 34% and one 6% respectively.
Book value per share increased two 2% quarter over quarter, and 10, 4% year over year to $21 61.
[noise].
We recognized the mark to market gain of $9 1 million on the company's investments and excellent storage.
And 900000 other companies see.
Yes, an io strip portfolio.
During the quarter, we originated or purchased quality investments, we purchased a $61 $3 million floating rate Freddie Mac K series Bp's with an estimated yield of 525 basis points or so.
We originated mezzanine convertible notes with an aggregate principal amount of $40 8 million that Rainer.
Rainer will discuss this investment in his remarks.
We originated a preferred equity investment for $30 million, yielding 10%.
Your refrigerated another preferred equity investment of $3 8 million yielding 10%.
We originated a third pillar preferred equity investment for $5 million, yielding 10, 5% after quarter end, we funded an additional $41 8 million to this investment.
We ended the quarter with 74 investments totaling approximately $1 7 billion.
During the quarter to single family rental loans will repay totaling $20 2 million with penalties up $3 6 million paid with the gross proceeds received $18 6 million was used to pay down the front.
Freddie Mac's heater facility.
As of February 17, 2022 across the portfolio weighted average coupon of 632% weighted average remaining term on investments of $6 five years weighted average launched value 67, 9% and.
The weighted average D. STR was 199 times values used for the collateral that we use and the LTV calculation as the value of the size of loans purchased originated.
As for multifamily Thats far assets that may dramatically over the past few years and months.
Paul will talk about these revised weighted average loan to values used in our estimates of the changes in the underlying collateral value during his prepared remarks.
As of December 31, our desktop will consist of the following $726 3 million of senior secured facility on the single family rental loans $59 9 million of senior secured facility on the mezzanine pool.
$286 3 million repurchase agreements $171 5 million of unsecured notes and $32 5 million of mortgages payable.
As of February 17, 2022, our debt has a weighted average remaining term of four eight years and a weighted average rate of $2, 79%, which provides a 353 basis points spread our investment income over the cost of our debt.
As of December 31, 23, 9% of our financing is subject to mark to market.
Debt to equity ratio was two five times at December 31.
We paid a dividend of $47.05 per share in the fourth quarter and the board has declared a dividend of <unk> 50 per share payable on March 31, the first quarter of 2022.
Our dividend is 114 times covered by earnings available for distribution and one three times covered by cash available for distribution.
Today, we are issuing guidance for earnings available for distribution of cash available for distribution for the first quarter of 2022 as follows.
Earnings available for distribution per diluted share of $1 22.
Cash available for distribution per diluted share of $1 seven.
Large increases over the prior quarter and prior year, driven by prepayment penalties on the single family rental loans that we've received.
For this quarter.
Yeah.
Yeah.
Now, let me turn it over to the rest of the team to provide their commentary.
Thanks, Brian for the fourth quarter and full year 2021 results continued to show strong performance across each of our investments in asset classes. We continue to focus on investment verticals, where we believe we have an advantage due to our experience in accounting and operating commercial real estate, our ability to leverage information from being both a known our operator and lender to commercial <unk>.
Real estate investments allows us to find relative value throughout the capital stack with the goal of delivering higher than average risk. Adjusted returns. We continue to believe our investment strategy focusing on credit investments in stabilized assets conservative underwriting that low leverage with well heeled sponsors will provide consistent and stable value to our shareholders.
During the fourth quarter the loan portfolio continued to perform strongly and is currently competitors to 69 individual investments with approximately $1 7 billion of total outstanding principal.
Loan portfolio is 98% residential with 45% invested in senior senior bonds collateralized by single family rental homes, and 53% invested in multifamily via agency MBS.
Preferred or Mezz too.
2% of the loan book is in life Sciences. The portfolio's average remaining term of six five years as 91% stabilized has a weighted average loan to value of $67 nine and an average debt service coverage ratio of almost two times as Brian mentioned in his earlier remarks, and Paul will describe further later on we believe the market on the value of the entire.
Our book is approximately 52% as new appraisals have not been performed on a large portion of the assets since they were originated in 2018 or 2019.
The portfolio is geographically diverse with a bias towards the southeast and southwest markets, Texas, Georgia, and Florida combined for approximately 50% of our of unexpected or on a geographic basis, 100% of our investments are current as mentioned in our earnings none of our underlying loans are currently in forbearance for references of the multifamily Forbearance report published by Freddie Mac.
Back on a monthly basis.
There are 243 for Brown <unk> Brown born loans totaling $2 1 billion of outstanding UBB equating to 90 basis points of the total Freddie Mac securitized loan population by loan count and 60 basis points of securitized unpaid principal balance.
Moving to the opportunities we were able to take advantage of during this quarter during the quarter. We originated two mezzanine notes on stabilized multifamily assets located in Dallas, Texas in Bentonville, Arkansas with an aggregate principal amount of $20 4 million. The sponsors on the two transactions are repeat borrowers and have extensive experience and the value add multifamily sector.
The properties are 98%, 95% occupied and weighted average debt service coverage ratio of 119 times.
Our mezz investments have an average current yield of six 5% and then I'll have an unlevered estimated yield of approximately 11% on November eight we purchased $30 million of preferred equity collateralized by Singleton has stabilized in pharmaceutical manufacturing property with a current yield of 10% on December nine we purchased $63 million.
Freddie Mac's floating rate case series B piece with an estimated yield of <unk> 520 fives. This bp's originated at tighter spreads than our previous case series floating investments at it rep as it represents the bottom 10% versus 75% of the debt capital stack has an underwritten debt service coverage ratio of over $2 three times with <unk>.
Strong sponsorship on the underlying loans.
During the quarter. We also originated a convertible note an amount of $20 5 million for a well heeled sponsor focus on ground leases with an estimated yield of 9% with future upside kind of look through loan to value of 18% to the single family rental book were repaid with a total principal balance of $22 million. The combined IRR realized on these investor.
<unk> was 31, 4%.
Paul Richard who will go into more detail on how the capital was accretively reinvest it in his prepared remarks. Shortly in summary, we continue to find attractive investments opportunities investment opportunities throughout our target markets and asset classes and we will continue to evaluate these opportunities with the goal of delivering value to our shareholders I would now like to hand, the call over to Paul Richards. Thanks, a lot.
During the fourth quarter. The company was again active in the primary bond market. As previously previously discussed we deployed $61 $3 million on the Freddie Mac floating rate EPS thats over plus 525.
Even as the market has experienced inflation headwinds, which have caused the market to price and multiple rate hikes. There has been an insatiable demand for Freddie Mac Bp's bonds. We have continued to see pricing tighten as evidenced by the last auction with spreads on the small balance loan decreases coming in higher than pre pandemic levels. We continued to be sensibly levered on a repo at rough.
$57 five LTV at quarter and lastly, we wanted to briefly touch on the continued performance of the <unk> loan pool at a Q1 2022 loan Paydowns all loans are current and performing as the demand has met tailwind for single family rental continues to pick up speed. We fully expect this trend to persist as tenant retention new leasing.
Lease growth rates and Occupancies are at all time highs, creating a tremendous backdrop, especially for us as a lender to high quality institutional as of our sponsors the portfolio has had to stop our loan paydowns in the first quarter of 2022, which has generated a combined IRR of roughly 35% versus the original underwritten IRR of only 9% due to the Earth.
As we speak given penalties to the investments, we're able to generate an additional $7 million of that.
Proceeds than the originally underwritten.
And approximately one third of the original investment time horizon to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to Matt Mcguire.
Thanks, Paul.
I was obviously pleased with our fourth quarter and full year results for 2021 and look forward to another strong year in 2022.
To quickly touch on a special situation investment we made late in the fourth quarter that Mike just mentioned.
A sophisticated ground in the sponsor arena, so from supply chain and Covid related financing delays.
And needed a quick and efficient financing solution later in the year. We responded in a span of two weeks in late December and met the sponsors needs originating $75 billion of convertible notes iulian advantage of 9% with an ability to convert to a comp to common equity of 12, 5% discount.
Cashman detachment point of our investment in the company's assets is roughly 18% LTV and create the profile the risk reward investment for <unk>, both in terms of yield and total return potential.
Finally, we are in the middle of refinancing next point storage partners capital stack as we speak we've chosen a litter to refinance the senior debt portion at a more favorable rates and proceeds and expect these efforts along with the strength in the self serve self storage sector generally to be accretive to the common equity held by Indra, we expect to close this financing in Q2, and we'll provide an update.
During our during our next quarterly results.
All we have for prepared remarks today and would now like to turn the call over to the operator for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Speaker phone. Please thanks, Jeremy function is turned off.
With which our equipment.
Just I wanted to ask a question. We'll go ahead and take our first question from Stephen laws with Raymond James.
Hi, good morning.
First of all congrats on a nice quarter and certainly another dividend increase that you guys delivered it to investors.
Can you talk maybe Brian a little bit about.
The guidance it looks like a big Q1, you know what what items are being pulled out and so I think that.
Sure.
It's like 45%.
Next year's total guide as in Q1, so can you talk a little bit about.
What's going to what's going to drive the one time items in Q1 to benefit earnings.
Yes, most of that increase is related to prepayment penalties the prepayments of the rest of our loans.
It's a.
Just a function of how that's calculated and the calculation of that metric is something that the.
<unk> has been focused on across the sector.
So with these prepayments that were seen and will probably continue to see just given the strength in the.
Single family sector.
We may see more of that down.
Down the road, but that's what's driving most of that decrease for the first quarter. Obviously the remainder is the new investments that we've made that we've discussed and then accretively reinvest in the payments that we're getting prepayments, we're getting on those <unk> loans.
Yeah as currently structured those are some of our lowest yielding divestments some work.
Following those back into higher yielding.
Feels like the ground lease that Matt mentioned.
So piggybacking on that Brian you know when you think about the guidance you guys just issued for the full year.
You know how conservative or how did you go about thinking.
Calculating.
Expected contributions you know maybe not in the next three months, let's say second half of this year in your guidance.
Yes, we didn't make any.
The assumptions around prepayments are one time type of thing. So we tried to give a more smoothed out stabilized return profile just based on the investments that we have.
Obviously, if people make those those prepayments.
We generally view that as a positive and that we can clip a big.
Penalty and <unk>.
Recognize that immediately, but then redeploy that into higher yielding investments.
And we've run those those analysis and scenarios that show.
Entire book repaid in 2022, what that would look like in <unk>.
What we can drive earnings and it would be hugely accretive to book value and.
Our earnings available for distribution and cash Bill for distribution.
Great.
Switching over to the portfolio one item.
The common stock investment looks like it appreciated nicely in Q4, but can you talk about your.
Intentions with that you know when you may look to say recent to harvest those gains and recycle capital and the cash flow investments.
Timing to that.
Steve I would not agree or are you talking about the.
The storage storage yes.
Yeah.
So.
We're probably going to close the refinancing of the senior debt.
I would say in May and then.
Following that we're going to restructure the prefer the extra space preferred.
And we expect to play in that.
It's a blend that down too.
Creating kind of an enhanced profile of the common equity at a value.
The yield to the common equity to make it as valuable as we can and then once we do that I think we to look to recap that out or.
We think it's better.
As a whole.
For an exit upon re IPO in 2023, which we think is viable.
We'll do that so look for look for an update in the second half of the year probably in Q2.
And we will have better visibility into it but either one of those.
Either one of those outcomes I think is would be would be greatly accretive for the company.
Right Yeah. That's helpful. Matt I appreciate you taking my questions. This morning.
Sure.
Once again that is star one to ask a question. We can go ahead and take our next question from Jade Rahmani with <unk>.
Thank you very much.
Can you say more about the ground lease investments.
Kind of entity this was and.
And the capital structure this is Karen.
The investment portfolio.
By some kind of equity interest.
If you could elaborate that would be helpful.
Yes, sure happy to I'd say, a private REIT that was forums.
And I think around.
Early 2020.
They raised capital of $1 44, a offering.
Raised about $110 million of equity.
And started originating deals through through 2021.
Hit a sophisticated sponsor hit the.
Externally managing this vehicle.
As in the fourth quarter with some additional lp's via a follow on for their 144 a offering.
We came in.
To close those deals so we effectively great staff with this instrument.
At the corporate level. So these are we funded the company the company than funds.
These investments and so.
Like we said, we like we like this risk reward we'd like the nine assets that they were originated ground leases on.
A significant portion of our multifamily.
Obviously, one of our bread and butter. So just jumped on it and we think it's a great great investment.
Again, both with yield and total return potential to the extent that we wanted to hold it.
Okay.
Was this a preferred equity investment.
Now it is true that this convertible note.
Okay got it.
I guess any update on any.
Progress residential single family rental portfolio I assume.
That has not started to prepay and if not when might you expect that to occur.
Oh, we haven't gotten any word from them or any communications or indications.
So it's hard to tell I mean.
It's a big number that they would have to prepay.
It's part of the progress Protium.
Deal and they are definitely issuers of Securitizations, having said that that market is.
Scott.
A lot wider here recently.
It really depends on what progress in prior you want to do with that portfolio.
Yes, if they wanted to repay it.
Immediately start to look for places to put it in I think we have plenty of places that we can.
We could roll that.
Paul you got any.
Indications from them on anything different no.
You said is exactly what our.
My thoughts are and it's roughly a $75 million to $80 million prepayment penalty as it currently stands so it's still a half year so that the prepayment was.
And so.
So by prepayments Youre getting what is the refinancing going into are they.
Sure.
And Lansing.
Or something else.
You break it up a little bit, but I think we got the just the question.
I think they're just going into either.
Characterizations or in some cases they are.
Getting other bank debt that essentially isn't necessarily cheaper than what they are rolling out of.
Because of the values of run up so much that theyre getting additional proceeds.
Their analysis is that its worth paying the.
The prepayment penalty and may be getting a.
Cheaper rate or somewhere similar but getting a lot higher LTV on their investments.
These investments were underwritten at 60%, 65% and today they can finance those at 80 85, even higher in some cases.
LTV. So I think the math is working out in their favor.
And that's where they are rolling it into.
The spread widening you mentioned in the securities market. What do you think is driving that is it a supply issue based on the magnitude of issuance in January that we saw or something else.
Hey, Jade its Paul Yeah, I think I think that's right I think you saw a very large increase in supply in Q4 of last year and are continuing in Q1 of this year.
Also the interest rate shock.
Five to seven years, so that didn't help either.
I think you'll probably see and then the Ltvs in general are 88, 5% in some cases on these deals.
Our higher as Bryan alluded to versus bank debt or in this case.
Have a 65% LTV loan with them correctly. So those are all factors kind of contributing to the spreads widening recently.
Okay.
Yes.
Is there a range of earnings post the first quarter or.
First quarter.
Could you tell us what earnings would be excluding the outsized repayment income.
Just.
And I think you're right.
Sure you know earnings expectations beyond these accelerated.
<unk>.
Yes, we can get that number.
And kind of pull out the.
The prepayments that we want to be careful.
<unk> been monitoring disclosures of these different metrics pretty closely so we want to make sure that were in.
In line with that and not providing something that's kind of outside of what they were looking for.
Okay.
Does the dividend increase content.
Any benefit from the prepayment income because I assume well reading the language in the press release. It says an increase in the quarterly dividend it doesn't site.
Specifically the first quarter, so that implies that this is a recurring.
The dividend is going to be 50 for the foreseeable future.
Is there any part of the dividend increase.
The SSR early prepayment income.
No.
It's meant to be a.
Our consistent dividend so.
It's a special dividend and it wasn't driven by any of the prepayment numbers.
So it's fair to assume that recurring earnings might be something close to that.
That's right.
Okay.
Okay.
Just a couple of a couple of things.
Yes.
Thanks, So much really appreciate your time.
Thank you.
It appears there are no further questions at this time I would like to turn the conference back to the speakers for any additional or closing remarks.
Yeah. Thank you I appreciate everyone's time and appreciate the questions will be in touch next quarter. Thank you.
And this concludes today's call. Thank you all for your participation you may now disconnect.
[music].